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Law and Banking Seventh Edition Kathlyn L. Farrell Catherine M. Brown
Law and Banking
Seventh Edition
Kathlyn L. Farrell
Catherine M. Brown
This publication is designed to provide accurate and authoritative information in regard to thesubject matter covered. It is sold with the understanding that the publisher is not engaged inrendering legal, accounting, or other professional service. If legal advice or other expert assistanceis required, the services of a competent professional person should be sought.
From a Declaration of Principles jointly adopted by a Committee of the American Bar Association anda Committee of Publishers and Associations.
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This textbook has been approved by the American Institute of Banking for use in coursesfor which AIB certificates or diplomas are granted. The American Institute of Banking isthe professional development and training affiliate of the American Bankers Association.Instructional materials endorsed by AIB have been developed by bankers for bankers.
© 2012 by the American Bankers AssociationSeventh Edition
Layout and composition of the Law and Banking textbook was done by Wendi Calvert([email protected]), Punxsutawney, PA.
in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—withoutprior written permission from the American Bankers Association.
Printed in the United States of America
Catalog Number: 3006962 ISBN: 0-89982-656-3
iiiContents
EXHIBIT LIST XI
PREFACE XV
ACKNOWLEDGMENTS XXI
CHAPTER 1 INTRODUCTION TO LAW AND BANKING
LEARNING OBJECTIVES 1INTRODUCTION 2Legal Environment of Banking Law 2Historical Background of U.S. Banking Law 5Creating Bank Law 13Uniform Commercial Code (UCC) 22SUMMARY 24SELF-CHECK AND REVIEW 25ADDITIONAL RESOURCES 25APPENDIX 27
CHAPTER 2 TORTS AND CRIMES
LEARNING OBJECTIVES 33INTRODUCTION 34Civil Law and Criminal Law 34Torts vs. Crimes 35Torts 36Crimes 40Criminal Law Process 46SUMMARY 47SELF-CHECK AND REVIEW 48ADDITIONAL RESOURCES 49
CHAPTER 3 INDIVIDUALS, SOLE PROPRIETORSHIPS,
AGENCIES, AND PARTNERSHIPS
LEARNING OBJECTIVES 51INTRODUCTION 52Individuals 52Sole Proprietorships 53Agencies 55Partnerships 62
Contents
SUMMARY 69SELF-CHECK AND REVIEW 70ADDITIONAL RESOURCES 71
CHAPTER 4 CORPORATIONS, LLCS, GOVERNMENT
AGENCIES, ESTATES, AND TRUSTS
LEARNING OBJECTIVES 73INTRODUCTION 74Corporations 74Limited Liability Companies 83Mutual Companies 86Governments and Government Agencies 86Estates 87Trusts 90SUMMARY 92SELF-CHECK AND REVIEW 93ADDITIONAL RESOURCES 93
CHAPTER 5 CONTRACTS
LEARNING OBJECTIVES 95INTRODUCTION 96Elements of Contracts 96Types of Contracts 104Third Parties and Contracts 108Contract Interpretation 111Contract Performance and Discharge 112Contract Breach and Damages 114SUMMARY 117SELF-CHECK AND REVIEW 118ADDITIONAL RESOURCES 119
CHAPTER 6 PROPERTY
LEARNING OBJECTIVES 121INTRODUCTION 122Real and Personal Property 122Transferring or Acquiring Property 123Multiple Ownership of Property 126Property Interest 127Acquiring a Security Interest in Property 131Liens 136Recording an Interest in Real Property 138SUMMARY 140
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Contents
SELF-CHECK AND REVIEW 142ADDITIONAL RESOURCES 142
CHAPTER 7 NEGOTIABLE INSTRUMENTS
LEARNING OBJECTIVES 143INTRODUCTION 144Negotiable Instruments and Their Parties 144Elements of Negotiable Instruments 148Rules of Interpretation 152The Electronic Environment 156SUMMARY 159SELF-CHECK AND REVIEW 160ADDITIONAL RESOURCES 161
CHAPTER 8 COLLECTIONS AND RETURNS
LEARNING OBJECTIVES 163INTRODUCTION 164Transfer of Negotiable Instruments 164Endorsement and Presentment 167Check Collection 175Check Return 180Federal Reserve Regulation J 183SUMMARY 184SELF-CHECK AND REVIEW 185ADDITIONAL RESOURCES 186
CHAPTER 9 CORPORATE RESPONSIBILITY
LEARNING OBJECTIVES 187INTRODUCTION 188Community Credit 188Branching 195Corporate Ethics 197Customer Rights 202SUMMARY 209END NOTES 211SELF-CHECK AND REVIEW 211ADDITIONAL RESOURCES 212
CHAPTER 10 DEPOSITS
LEARNING OBJECTIVES 213INTRODUCTION 214FDIC Insurance Regulations 214
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Reserve Requirements 220Interest on Deposits 223Consumer Protection and Deposit Accounts 223Customer Identification Program 240SUMMARY 241END NOTE 242SELF-CHECK AND REVIEW 243ADDITIONAL RESOURCES 243
CHAPTER 11 CONSUMER LENDING
LEARNING OBJECTIVES 245INTRODUCTION 246Consumer Lending History 246Common Types of Consumer Loan Products 247The Credit Process 248Credit Information Use and Reporting 267Debt Collection and Maintenance 270SUMMARY 275SELF-CHECK AND REVIEW 277ADDITIONAL RESOURCES 278
CHAPTER 12 REAL ESTATE LENDING
LEARNING OBJECTIVES 279INTRODUCTION 280Real Estate Ownership and Transfer 280Fair Lending 281Truth in Lending Disclosures 285Loan Originator Compensation 292Real Estate Settlement Procedures Act 293Homeowners Protection Act 297Adjustable Rate Mortgage Regulation 299Default Protection 300SUMMARY 306SELF-CHECK AND REVIEW 307ADDITIONAL RESOURCES 308
CHAPTER 13 BANKRUPTCY
LEARNING OBJECTIVES 309INTRODUCTION 310History of Bankruptcy Law 310Types of Bankruptcy Actions 312Bankruptcy Estate 314
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Bankruptcy Trustees 316Creditor Rights in Bankruptcies 320Debtor Relief in Bankruptcies 322SUMMARY 327SELF-CHECK AND REVIEW 328ADDITIONAL RESOURCES 329
CHAPTER 14 TRUST, INSURANCE, AND SECURITIES
LEARNING OBJECTIVES 331INTRODUCTION 332Trust Activities 332Financial Modernization 337Dodd-Frank Changes to Securities Activities 340Insurance Activities 340Securities Activities 344SUMMARY 351SELF-CHECK AND REVIEW 352ADDITIONAL RESOURCES 353
CHAPTER 15 INTERNATIONAL BANKING
LEARNING OBJECTIVES 355INTRODUCTION 356U.S. International Banking Law 356Foreign Corrupt Practices Act 359International Laws and Treaties 359Organizing International Banking 365International Banking Services 368SUMMARY 377SELF-CHECK AND REVIEW 379ADDITIONAL RESOURCES 379
CHAPTER 16 MARKETING
LEARNING OBJECTIVES 381INTRODUCTION 382Banking and Marketing 382FDIC Statement in Advertisements 383Nondeposit Investment Products 384Unfair, Deceptive, or Abusive Acts or Practices 386Telemarketing Rules 389Credit Card and Gift Card Sales 394Loan and Deposit Products 400E-Commerce and Marketing 403
Third-Party Arrangements 408SUMMARY 410END NOTES 412SELF-CHECK AND REVIEW 412ADDITIONAL RESOURCES 413
CHAPTER 17 SAFETY AND SOUNDNESS
LEARNING OBJECTIVES 415INTRODUCTION 416Limits on Lending 417Restrictions on Insider Lending 420Margin Requirements 424Transactions with Affiliates 427Bank Security 429Appraisal Reform 435Capital Requirements and Oversight of Large Institutions 437SUMMARY 438END NOTES 440SELF-CHECK AND REVIEW 440ADDITIONAL RESOURCES 441
CHAPTER 18 INFORMATION REPORTING
LEARNING OBJECTIVES 443INTRODUCTION 444Recordkeeping and Reporting 444Home Mortgage Disclosure Act 445Money Laundering and Counterterrorism Reporting 448OFAC Reporting Requirements 455Customer Financial Records 457IRS Information Reporting 459SUMMARY 462SELF-CHECK AND REVIEW 463ADDITIONAL RESOURCES 463
ANSWERS TO LEGAL CASE STUDY QUESTIONS
Chapter 1Wells Fargo Bank of Texas, N.A., v. Randall James 465
Chapter 2The Luncheon Pitch 465
Chapter 3The Case of the Spoiled Partnership 466
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Chapter 4The Case of the Amended Resolutio 466
Chapter 5U.S. Nursing Corporation v. St. Joseph Medical Center 467
Crowne Bank v. Tri-State Airport Authority 467
Chapter 6Michael J. Colorassa and Mary Colorassa v. Mary Regasi 468
Chapter 7Worldwide Travel v. Star State Bank 468
Chapter 8High-Point State Bank v. TV Sales, Inc. 469
Wayne v. Eisen 469
Chapter 9Ralph Kearney v. Greenwood Bank 469
Chapter 10The Case of the Delayed Deposit 470
Chapter 11Miller v. Midway Bank and Trust 470
Chapter 12Clark v. Premium Mortgage Corporation 470
Chapter 13Monroe v. Quality Loan & Trust Co. 471
Chapter 14Clark v. State National Bank 471
Chapter 15Specialty Dress Designers, Inc., v. Brastic Bank 472
Chapter 16Hilliard v. FBC National Bank 473
Chapter 17Chaney v. State National Bank 473
Chapter 18Addison v. Fireside State Bank 474
ANSWERS TO SELF-CHECK AND REVIEW QUESTIONS
Chapter 1 475Chapter 2 476Chapter 3 478Chapter 4 479
Chapter 5 481Chapter 6 482Chapter 7 484Chapter 8 486Chapter 9 488Chapter 10 490Chapter 11 492Chapter 12 493Chapter 13 495Chapter 14 497Chapter 15 499Chapter 16 500Chapter 17 502Chapter 18 504
GLOSSARY 507
INDEX 527
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CHAPTER 1
Exhibit 1.1 Regulators of the Banking Industry 4Exhibit 1.2 Milestones in the Evolution of the U.S. Banking System 5Exhibit 1.3 The Federal Reserve Districts and Branch Cities 7Exhibit 1.4 Timeline of Banking Legislation in the Twentieth Century 7Exhibit 1.5 Consumer Protection Laws 8Exhibit 1.6 Banking Law in the Early Twenty-First Century 9Exhibit 1.7 How a Law is Made in Congress 14Exhibit 1.8 Sample Bill 15Exhibit 1.9 Categories of Federal Reserve Regulations 16Exhibit 1.10 Final Rule Published in the Federal Register 17Exhibit 1.11 U.S. and State Court Systems 20
CHAPTER 2
Exhibit 2.1 Civil vs. Criminal Cases 35Exhibit 2.2 Counterfeit Currency: Know Your Money 41
CHAPTER 3
Exhibit 3.1 Titling Accounts and Documentation for Individuals, Sole Proprietorships and Partnerships 54
Exhibit 3.2 Power of Attorney Form 58Exhibit 3.3 Advantages and Disadvantages of Sole Proprietorships
vs. Partnerships 63Exhibit 3.4 Partnership Agreement 64
CHAPTER 4
Exhibit 4.1 Sample Articles of Incorporation 75Exhibit 4.2 Department of Justice Guidelines for Deciding When to
Charge a Corporation with a Criminal Offense 83Exhibit 4.3 Articles of Dissolution 84Exhibit 4.4 Comparison of Limited Liability Company and Corporation 85Exhibit 4.5 Letters of Testamentary 89Exhibit 4.6 Affidavit of Trust 91
CHAPTER 5
Exhibit 5.1 Unilateral vs. Bilateral Contracts 99Exhibit 5.2 Sample Promissory Note for a Variable Rate Loan 101Exhibit 5.3 Sample Click-On Agreement 106
Exhibit List
xiExhibit List
CHAPTER 6
Exhibit 6.1 Security Agreement 132Exhibit 6.2 Other Security Agreement Provisions 133Exhibit 6.3 Uniform Financing Statement 134Exhibit 6.4 Methods for Perfecting a Security Interest 135Exhibit 6.5 Mortgage 137Exhibit 6.6 Deed of Trust 139
CHAPTER 7
Exhibit 7.1 Parties to a Check 145Exhibit 7.2 Sample Sight Draft 145Exhibit 7.3 Trade Acceptance 146Exhibit 7.4 Banker’s Acceptance 146Exhibit 7.5 Sample Check 147Exhibit 7.6 Promissory Note 147Exhibit 7.7 Sample Certificate of Deposit 148Exhibit 7.8 Requirements of a Negotiable Instrument 149Exhibit 7.9 Sample Substitute Check 156
CHAPTER 8
Exhibit 8.1 Bank Roles in Collection 165Exhibit 8.2 Check Collection Routes—Depositary and Payor Bank
are the Same 165Exhibit 8.3 Parts of the Check Routing Symbol 166Exhibit 8.4 Endorsement Areas on Back of Check 167Exhibit 8.5 Types of Endorsements 168
CHAPTER 9
Exhibit 9.1 CRA Notice for a Bank’s Main Office 190Exhibit 9.2 Illegal Discrimination—Disparate Treatment 194Exhibit 9.3 Contents of a Typical Bank Code of Conduct 201Exhibit 9.4 Sample EEO Poster 203Exhibit 9.5 Antidiscrimination Laws 206
CHAPTER 10
Exhibit 10.1 FDIC Insurance Sign 215Exhibit 10.2 Reserve Requirements Notice 220Exhibit 10.3 Error Resolution Disclosure 229Exhibit 10.4 Conditions for Next-Day Availability 231Exhibit 10.5 Regulation CC Model Disclosure 234Exhibit 10.6 Truth in Savings Disclosure 237
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xiiiExhibit List
CHAPTER 11
Exhibit 11.1 Sample Disclosure Form for Closed-End Installment Loan 249Exhibit 11.2 Sample of Charges Included in the Finance Charge 250Exhibit 11.3 Sample Variable-Rate Disclosure 252Exhibit 11.4 Home Equity Line of Credit Advertising 256Exhibit 11.5 Adverse Action Notice 263Exhibit 11.6 Model Closed-End or Net Vehicle Lease Disclosure 265Exhibit 11.7 Sample Notice to Cosigners 267Exhibit 11.8 Sample Consumer Report 268Exhibit 11.9 Unfair Debt Collection Practices 271Exhibit 11.10 OCC Rules for Debt Cancellation Contracts and
Debt Suspension Agreements 274Exhibit 11.11 OCC Short Form Disclosure Sample 275
CHAPTER 12
Exhibit 12.1 ECOA Disclosure of Voluntary Data Notation 282Exhibit 12.2 Disclosure of Right to Receive a Copy of an Appraisal 283Exhibit 12.3 Equal Housing Lender Poster 284Exhibit 12.4 Sample Notice of Right of Rescission 289Exhibit 12.5 Sample HOEPA Disclosure Notice 290Exhibit 12.6 Sample Good Faith Estimate 295Exhibit 12.7 Sample HUD-1 Form 296Exhibit 12.8 Sample PMI Disclosure 298Exhibit 12.9 Sample Special Flood Hazard Determination Notice 302Exhibit 12.10 Sample Features of Nontraditional Mortgages 305
CHAPTER 13
Exhibit 13.1 Bankruptcy Abuse Prevention and Consumer Protection Act Provisions 311
Exhibit 13.2 Personal Bankruptcy Filings by Quarter 1992 to 2010 312Exhibit 13.3 Comparison of Bankruptcy Chapters 315Exhibit 13.4 Exempted Assets under Federal Law 316Exhibit 13.5 Perfecting Security Interest 317
CHAPTER 14
Exhibit 14.1 Selected Contents of 12 CFR 9, OCC Regulation 9,Fiduciary Activities of National Banks 334
Exhibit 14.2 MOECA Rating System for Trust Examinations 335Exhibit 14.3 Sample Insurance Disclosure 344Exhibit 14.4 Sample Credit Disclosure 345Exhibit 14.5 Stock Certificate 347Exhibit 14.6 Reporting Lost or Stolen Securities 350
CHAPTER 15
Exhibit 15.1 Sample Documentary Collection Instructions 364Exhibit 15.2 Sample Foreign Draft 369Exhibit 15.3 Sample Letter of Credit 371Exhibit 15.4 Sample Standby Letter of Credit 373Exhibit 15.5 Other Types of Letters of Credit 373
CHAPTER 16
Exhibit 16.1 FTC and FCC Telemarketing Rules 394Exhibit 16.2 Sample TILA (Reg. Z) Form for Credit Card
Applications and Solicitations 396Exhibit 16.3 FTC Short Form Notice on Principal Promotional Document 400Exhibit 16.4 Marketing Delivery Channels 403Exhibit 16.5 Sample FTC Guidelines for Internet Web Site Disclosures 404Exhibit 16.6 Sample Trade Name Acknowledgement Form 408
CHAPTER 17
Exhibit 17.1 Regulation O and Transactions 422Exhibit 17.2 Statement of Purpose for an Extension of Credit
Secured by Margin Stock, Federal Reserve Form U-1 426Exhibit 17.3 EPPA Poster 432
CHAPTER 18
Exhibit 18.1 HMDA Loan Application Register (LAR) 447Exhibit 18.2 Currency Transaction Report FinCEN Form 104 449Exhibit 18.3 Suspicious Activity Report (SAR) 453Exhibit 18.4 Request for Taxpayer Identification Number and
Certification Form W-9 460
xiv Law and Banking
xvPreface
Law and Banking is intended to give those who are new to banking a broad under-standing of the laws and regulations that pertain to banking today. Law andBanking introduces fundamental legal and regulatory principles and explains howthey apply to bank products, services, and customer relationships.
OBJECTIVES OF THIS BOOK
• Explain the legal and legislative sources of U.S. banking law and the judiciary’s and regulatory agencies’ roles in interpreting the law (chapter 1).
• Describe the major torts and crimes that affect the banking industry(chapter 2).
• Identify the customer relationships of individuals, sole proprietorships,and partnerships, and a bank’s legal obligations and responsibilities whentransacting business with these customers (chapter 3).
• Identify the legal entities of corporations, government agencies, limitedliability companies, estates, and trusts, and a bank’s legal obligations andresponsibilities when transacting business with these entities (chapter 4).
• Explain how contractual relationships are formed and enforced and thedifferent elements of contracts (chapter 5).
• Describe how property may be acquired, transferred, and owned, andhow creditors obtain property interests (chapter 6).
• Describe the requirements of negotiable instruments as defined byUniform Commercial Code Article 3 and other laws (chapter 7).
• Describe the parties and their rights in the transfer of negotiable instrumentsand the legal responsibilities of banks in collections and returns as governedby the UCC and federal regulation (chapter 8).
• Explain the legal obligations of banks to act responsibly as businesses andin their dealings with customers (chapter 9).
• Identify the laws and regulations that protect bank deposits and governthe relationship between a bank and its depositors (chapter 10).
• Describe the legal protections provided to borrowers and the rights andresponsibilities of banks when they offer consumer credit and make loans(chapter 11).
• Identify the laws and regulations that protect borrowers and lenders inreal estate transactions and that serve the community interest (chapter 12).
• Explain how the asset liquidation and reorganization provisions of bankruptcylaw protect the interests of both debtors and creditors (chapter 13).
Preface
• Describe the legal obligations, including the requirements of the Dodd-Frank Act, that banks must fulfill when they serve in a fiduciary capacityand provide insurance and securities products and services (chapter 14).
• Discuss how the global trade and investment activities of U.S. banks areaffected by both domestic and international law, including the ForeignCorrupt Practices Act (chapter 15).
• Explain laws and regulations that govern bank marketing and advertisingpractices (chapter 16).
• Identify the bank safety and soundness laws that help protect bank assets,guard against deposit insurance system losses, govern capital requirements,and reduce risk in the banking system (chapter 17).
• Explain some requirements placed on banks to report financial and customerinformation to government authorities and the responsibilities placed onbanks to ensure safeguards when receiving, using, and disclosing customerinformation (chapter 18).
CHANGES TO THIS EDITION
In addressing these topics, this text updates the material covered in the sixth editionof Law and Banking. The changes in this seventh edition include
• The effects of the subprime mortgage crisis, the broader financial crisis,and the concerns over the “too big to fail” issue that led to passage of theDodd-Frank Wall Street Reform and Consumer Protection Act, the mergerof the Office of Thrift Supervision and the Office of the Comptroller ofthe Currency, the passage of the Emergency Economic Stabilization Act,and the creation of programs intended to assist homeowners keep theirhomes (chapter 1).
• An expanded discussion of fraud, insider trading, elder financial fraud,pharming, phishing, shoulder surfing and skimming, and such Internetfraud crimes as hacking into payment systems (chapter 2).
• A revised discussion of account documentation and titling and the powerof attorney (chapter 3).
• Additional information about the rights and powers of shareholders, theresponsibilities and liabilities of boards of directors, the rights of creditorsfiling claims against estates, and types of trusts, including revocable andirrevocable trusts (chapter 4).
• Additional information about foreclosure and state law (chapter 6)• An explanation of the amendments to regulations governing funds
availability, including check processing and collection (chapter 8). • An update of the information on the Community Reinvestment Act and
Fair Lending to include the additional responsibilities imposed on financialinstitutions by the Dodd-Frank Act (chapter 9).
• New details regarding deposit insurance, resulting from the repeal ofRegulation Q and the passage of the Emergency Economic Stabilization Act,new disclosure requirements mandated by emendations to Regulation E, and
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xviiPreface
the elimination of nonlocal checks and new standards for availability offunds (chapter 10).
• Information regarding the Credit CARD Act of 2009 and other changesto consumer lending resulting from the Dodd-Frank Act (chapter 11).
• Additional information on the subprime crisis and information on the broader financial crisis that led to the Dodd-Frank Act in 2010 (chapter 12).
• Describes the changes the Dodd-Frank Act made to bank securities activitiesand the effects of the Financial Services Regulatory Relief Act on banksoffering brokerage services (chapter 14)
• Introduces a short explanation of the Foreign Corrupt Practices Act andexplains how the Dodd-Frank Act affects foreign exchange transactions(chapter 15).
• Provides new information on do-not-call lists, on the Credit CardAccountability Responsibility and Disclosure Act’s rules on the marketingof credit cards, and on the OCC’s rules on marketing gift cards. Presentsinformation about the Dodd-Frank Act and the Consumer FinancialProtection Bureau and their authority to make rules against abusive actsand practices (chapter 16).
• Information on how the Dodd-Frank Act restricts capital and affiliatetransactions and affects real estate appraisals, and how the FinancialStability Oversight Council monitors the risk of systemically importantinstitutions (chapter 17).
• Information regarding impending changes to the Home Mortgage DisclosureAct reporting requirements resulting from the Dodd-Frank Act (chapter 18).
The previous editions introduced the following graphic design features that continuein this text: the text is typeset in a one-column format with featured sidebars thathighlight relevant information, and graphics and prominent color visually enhance thereading and learning experience. Instructional design features that were kept include
• Learning objectives at the beginning of the chapter that convey whatshould be learned from the material presented.
• An introduction that sets the stage for topics covered in the chapter. • Historical facts, “Did you know?” features, sidebars, charts, and exhibits
that supplement chapter content. • Definitions in sidebars for key terms bolded in the text. • Legal case studies with questions that test understanding of legal concepts
and principles. • Situations that present the application of legal principles. • A summary of the chapter’s main points. • Self-check and review questions for testing comprehension of chapter
content. • A list of additional resources, including publications and Web sites that
contain material related to chapter content.
• Separate sections at the back of the book with answers to chapter self-check and review and legal case study questions.
• A glossary of terms used in the text. • An index that can be used to locate content.
PART ONE: PRINCIPLES
Chapter 1 describes the regulations, statutes, and codes that provide the legal frameworkwithin which the business of banking is conducted. These laws and regulations definebanking, the types of activities conducted, the obligations that must be met, and thesanctions applied when rules are not obeyed. Violations of law, which are known astorts and crimes, that most affect bankers and the banking industry are the subjectof Chapter 2.
Chapters 3 and 4 look at the different types of customers who do business withbanks and the legal considerations that apply. The legal entities of individuals, soleproprietorships, and partnerships are covered in Chapter 3. Chapter 4 addressesthe legal entities of corporations, government agencies, estates, and trusts.
Most banking transactions involve a contract, which is the subject of Chapter5. The legal rights and duties of the parties under a contract are covered, as arerequirements under common law and statutory law for having a legally enforceablecontract. In Chapter 6, the discussion turns to property, which is a contractual elementof consideration in many banking transactions. This chapter explains how propertycan be acquired, transferred, and owned under the law; how laws govern the rightsof owners to possess and use property; and the rights of creditors to place liens onproperty to ensure repayment.
Chapters 7 and 8 address the laws that govern the payment process. The principletopic of Chapter 7 is Uniform Commercial Code Article 3, which governs therights and duties of parties to negotiable instruments such as checks. When a checkis presented for payment, several laws apply, including UCC Article 4 andRegulation CC. Chapter 8 discusses the affect of the UCC and federal law as it appliesto the responsibilities of the parties involved in check collections and returns, includingbanks as they perform their various payment functions.
In Chapter 9, the focus turns to the subject of corporate responsibility. Bankshave unique lending and deposit-taking powers, and the federal government hasenacted laws and regulations that oblige banks to be responsible to serve the peopleand businesses located in their communities. For their part, bank employees mustadhere to high standards of integrity and ethical behavior and protect the privacyof the bank–customer relationship.
xviii Law and Banking
xixPreface
PART TWO: APPLICATIONS
Chapter 10 begins the analysis of how the law applies to specific areas of bankoperations. In Chapter 10, the various laws and implementing regulations thatgovern deposits are explored. This includes reserve requirements (Regulation D),the Electronic Fund Transfer Act (Regulation E), the Expedited Funds AvailabilityAct (Regulation CC), and the Truth in Savings Act (Regulation DD). It alsodescribes the changes in the deposit market due to the repeal of Regulation Q.
Chapter 11 centers on consumer loan products. Consumer protection laws likethe Truth in Lending Act and the Equal Credit Opportunity Act govern every stageof the lending process, from application to credit decision making and notification.Perhaps no product is more subject to laws and regulations than credit secured by realproperty. The application of laws to real estate lending is the subject of Chapter 12.
One of the possible consequences of a lending relationship is bankruptcy.Bankruptcy law protects the interests of both creditors and debtors. Chapter 13looks at the provisions of bankruptcy law that allow debtors to seek protection from theircreditors. Provisions also allow creditors to seek the orderly liquidation or reorgan-ization of the debtor’s property and recover something of value for the funds theyloan. In covering this topic, the requirements of bankruptcy law are discussed,including the Bankruptcy Abuse Prevention and Consumer Protection Act.
In Chapter 14, the laws governing trust, insurance, and securities activities arediscussed. Although banks have long been involved in trust activities, and the lawsgoverning these activities are well established, the Gramm-Leach-Bliley Act hasaltered the legal and regulatory framework to allow banks to offer insurance andsecurities products. In 2010, the Dodd-Frank Act made some changes to a bank’strust and securities activities. Other legal requirements that specifically apply totrust, securities, and insurance activities are covered also, including UCC Article 8and the Lost and Stolen Securities Program.
International bank law and regulation is the subject of Chapter 15. Any bankwith international activities is subject to U.S. banking laws and to comparable lawsand regulations in the foreign country or countries in which it operates. This createscomplex and unique legal and compliance challenges for an internationally active bank.
Chapter 16 reviews laws and regulations that affect bank marketing activities.Banks are subject to a number of laws and regulations issued by banking agenciesand other federal agencies such as the Federal Communications Commission. Thelaws and regulations have evolved to keep pace with different marketing channelssuch as e-mail and the Internet.
Chapter 17 examines the laws that help ensure bank safety and soundness.Federal and state governments impose safety and soundness laws because of thecentral role banking plays in the economy. These laws are wide-ranging and affect
everything from the bank’s physical premises to the use of its loanable funds, its capi-tal requirements, transactions with insiders and affiliates, and the value of collateral.This textbook concludes with an examination of laws that govern the collection andreporting of financial and customer information, which is the subject of Chapter 18.
xx Law and Banking
xxiAcknowledgments
Developing a textbook and related course materials requires the knowledge of differentprofessionals. The American Bankers Association extends grateful thanks to Kathlyn L.Farrell and Catherine M. Brown, subject matter experts and authors, and to thefollowing banking and legal professionals for their suggestions and contributionsto Law and Banking, seventh edition.
Ken Blendea, CFSSP, CFCIAVP, Security OfficerNational Bank and TrustWilmington, Ohio
Leslie T. Callaway, M.A., CRCM,CAMSCompliance Project Manager American Bankers Association Washington, D.C.
Melody K. CharltonVice PresidentChief Compliance OfficerPrudential Real Estate and Relocation Services, Inc. Scottsdale, AZ
Denyette DePierroSenior Counsel IIAmerican Bankers AssociationWashington D.C.
Marlene Gardner, CAMSBSA/AML/OFAC OfficerChief Security OfficerLake Sunapee BankNewport, NH
Tom JuddDirector, Technical ServicesAmerican Bankers AssociationWashington D.C.
Jeanne P. KelleySenior Vice President —Risk ManagementSuffolk County National BankRiverhead, New York
Cynthia L. StuartVice President of Retail BankingConnecticut River Bank, N.A.Littleton, NH
Karen WrightManagement ConsultantJacksonville, FL
Acknowledgments
xxii Law and Banking
Ms. Kathlyn L. Farrell, CRCM, CAMS, is a Managing Director of Treliant RiskAdvisors, LLC, a Washington D.C. based financial advisory and regulatory complianceconsulting company.
Ms. Farrell has more than 30 years’ experience in the banking industry, includingin-house counsel for medium and large banks. Her experience encompasses federal andstate regulatory compliance, secured lending transactions, and the management of loansin litigation and bankruptcy. She has conducted compliance seminars, includingInternet-based compliance training for Office of Thrift Supervision examiners. She isthe co-author of Law and Banking, 6th edition, the author of Law and Banking:Principles 4th edition, the author of the Reference Guide to Regulatory Compliance, nowin its 22nd edition, the co-author of the first edition of the Compliance Audit Manual,and the author of many articles in the ABA Bank Compliance Magazine, all publishedby the American Bankers Association. Ms. Farrell has served as a faculty advisor for theNational Compliance School. She also has worked in the legal division of GeneralElectric Capital Corporation.
Ms. Catherine M. Brown is also a Managing Director of Treliant Risk Advisors,where she co-leads with Ms. Farrell the firm’s fair lending and compliance practice.Ms. Brown has significant expertise in requirements and trends in general regulatorycompliance, compliance management, and enterprise risk management. Ms. Brownhas designed and implemented various aspects of compliance programs for large,complex institutions, and she has considerable experience in managing relationshipswith and examinations by federal regulatory agencies.
With over 13 years of legal and regulatory compliance experience, Ms. Brown heldseveral compliance related positions for Charter One Bank, N.A./Citizens FinancialGroup, most notably as Senior Vice President and Chief Corporate Compliance andEthics Officer. A frequent speaker and author on compliance related topics, shed hasserved on the faculty of the American Bankers Association’s Intermediate ComplianceSchool.
Ms. Brown received her J.D. from the University of Dayton School of Law and anM.B.A. from Case Western Reserve University. She is active in the American BarAssociation.
About the Authors
